“Don’t tell me what you value, show me your budget, and I’ll tell you what you value.” – President Joe Biden (amongst many others!)
Anyone who has worked with me for any length of time knows that I’m a bit of a budgeting obsessive. The first question I typically ask potential clients is “what is your budget this year?” and, unfortunately, 50% of groups I talk to can’t answer that question. They often can’t even tell me what the income or expense number was on their last 990 tax doc, let alone any more complex numbers like their net assets or cash reserves.
Many small groups think of budgeting as a trap: if you create this document with numbers, then do not hit those numbers, funders or Board members will think you’ve failed. But that is not what a budget is!
A budget is a plan; it is a snapshot of what you thought might happen at a specific moment in time. It is something that you measure against to learn more about how to manage your business so that you can make the practice of management easier in the future. Budgets, cash flows, balance sheets: these are all tools to ensure you aren’t surprised by your money. In my experience, there are few things more stressful than being surprised by a challenging financial position.
But financial management isn’t only about knowing when to pay bills or how much you need to produce a show. How and how often you engage with the financial needs of your organization affects everything you do. For example:
- Do you use cash or accrual accounting methods? This can affect your relationship with a funder if you misuse their grant because of misaligned timelines, or use grant monies before the project for which it was allocated even occurs.
- Do you track your cash flow along with doing monthly budget year-to-date and projection reports? If you are only doing one, you’re only getting half the story! Your bank account may seem flush, but that could be because a big grant just hit the bank. If you make spending decisions just based on the number you see in your account, you could be spending tomorrow’s money or limiting much-needed investment in the future.
- Are you putting off doing your 990 because you don’t think you have time? Many foundations require a recent tax document (i.e. the fiscal year has ended within the past 18 months) in order to fund you. You could be declined simply because you are not as timely with your tax documents as other applicants.
- Do you say you value fair pay, but don’t have a budget doc that shows appropriate fees for anyone working for you – artists or administrators? A panelist judging your grants may feel the way President Biden and I both feel: you can tell me one thing, but if you don’t put money behind it, then I do not believe that you truly value it!
I know financial management scares a lot of people, but it is such a powerful tool for everything we do in an arts organization. From planning to reporting, recruitment to fundraising, knowing your numbers and finding ways to stay on top of them is critical for success. So what are the things you should prioritize if financial management has not been your top priority in the past?
- Know the IRS requirements for your budget level but also know what the industry expects. While you can file extensions for your 990 if you’re behind, many funders may begin to ask questions if you consistently miss the typical deadline (which is the 15th of the 5th month after the end of your fiscal year). Additionally, while the IRS does not require you to do an audit until your budget reaches $750,000, some funders may begin requiring one to apply once to pass the $250,000 mark. Now that you know this, contact your accountant in the final month of your fiscal year to get started as soon as you can on your tax docs! The sooner you get them done, the sooner you can stop thinking about them for the year!
- Make a budget – simple is fine! – and begin reporting against it monthly. What do I mean by that? Create two columns in your budget sheet to the right of your planned budget: one for year-to-date (YTD) and one for projections. In YTD put what you’ve spent or earned to date in each line item. Then, based on that number and what you now know to be true, project out where you now think the year will end. This is not a “new” budget, but a report against your budget, and it is absolutely likely that those numbers will not match.
- Try to do a cash flow. You might need help with this, but start simple. Go month by month and put what money you think will actually be deposited into your bank account that month, and then what money is coming out. A grant may be awarded in May, but may not hit your bank until October. This is important information to have for decision making!
Setting all of this up is the hard part. Once you have the tools and get in the habit of updating them monthly, this work becomes easier and more ingrained in all of your decision making as you go along. If you need help, you can check out our budgeting workbook, contact us about consulting, or reach out to a financial advisor to help you get started. The longer you wait, the harder it gets, so I encourage you to start today!
Thank you to the website Nonprofit Accounting Basics for the useful, practical information!
